By John Allen, Co-Head of the Defense and Government Services – BB&T Capital Markets | Windsor Group
Any business leader who has been through a failed acquisition looks back to see what went wrong with the deal. While it can be any number of issues, one thing is for certain, ill-conceived due diligence leads to disaster.
M&A transactions are among the most complex activities a business can undertake. So, it should come as no surprise that many M&As fail every year. Why? Because something goes wrong during the due diligence process. A strategic approach to due diligence is critical to the success of an M&A and is the key to avoiding catastrophe.
The list of due diligence mistakes that companies make could go on indefinitely. However, according to a recent article in Washington Technology:
Virtually every conceivable issue that can arise during due diligence is solvable. Problems only arise when such issues are left to chance. A strategy aimed at leading buyers to potential trouble spots rather than allowing them to discover problems on their own typically creates a spirit of trust between the buyer and seller. With strong trust in place, buyers are more willing take an intellectual approach to solving due diligence challenges rather than an emotional one. Emotional responses are often the kiss of death for merger and acquisition transactions.
Most M&A deals begin with romance. Two corporate hearts beating as one is very compelling when one or both companies fall in love. However, as companies struggle for competitive advantage, a failed M&A damages not only profitability but the health of the core business as well. Failed growth strategies deplete company resources, including personnel, finances, morale, and so on.
M&As do not fail because of the unknown. More than half of all M&As fail because dealmakers are unwilling to face the known. The focus of due diligence is typically on legal and financial aspects of the transaction, this leaves many other risk factors to simmer until implementation begins. But by then, it is too late. Dealmakers need to identify and examine other potential sources of failure during the due diligence process and be willing to walk away if failure is too great a possibility.
With this in mind, it is nearly impossible for the buyer to conduct due diligence without the cooperation of the seller’s management team. Even without full cooperation, many buyers move forward with deals because they have put so much time, money and effort into ensuring the transactions happens. Turning back seems impossible. But, this can be a big mistake.
With a strategic approach to M&A transactions, all parties are more likely to reach the desired outcome. At the end of the day, applying focused due diligence is not simply to green-light a deal, but to help ensure the long-term viability of the company that emerges from the acquisition.
If you have ever been involved in a failed M&A, I’m sure you could point to more than one reason the deal fell through. But, was it due to an unwillingness to successfully conduct a strategic-focused due diligence process?